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    FSB Studies Vulnerabilities Related to USD Funding in Emerging Markets

    April 26, 2022

    The Financial Stability Board (FSB) published a letter to the G20 Finance Ministers and Central Bank Governors that sets out financial stability issues arising from Russia’s invasion of Ukraine. It also published a report that examines external vulnerabilities in the emerging market economies associated with USD funding.

    The G20 letter discusses the current outlook for financial stability and sets out the FSB’s plans the coming months to assess and address emerging vulnerabilities such as high debt levels in the non-financial sector and stretched valuations. The letter lays out areas that warrant particular attention, including linkages between commodity markets and the rest of the financial system; financial system leverage and possible amplifiers in the event of market stress; and cyber risks. FSB is intensifying monitoring of the market developments and emerging vulnerabilities, with a focus on commodity markets, margining, and leverage to strengthen the non-bank financial intermediation (NBFI). FSB is developing a systemic approach to NBFI along with the policy proposals that are effective from a systemwide perspective. In October 2022, FSB will deliver a comprehensive progress report on various initiatives under the NBFI work program to the G20 Summit, including on the main findings of relevant FSB and standard-setting body initiatives and on policy proposals to address systemic risk in NBFI. The letter stresses the importance, and increased urgency, of the FSB’s ongoing policy work to address the financial risks from climate change; strengthen the resilience of non-bank financial intermediation; and regulate and supervise "unbacked" crypto-assets, stablecoins, and cyber risks. The letter also outlines the FSB work on analyzing the impact of the rapidly evolving Decentralized Finance (DeFi) on financial stability, to help to create the necessary conditions for safe innovation.

    The report presents findings of the FSB and International Monetary Fund’s (IMF) work on the interaction between USD funding and external vulnerabilities in emerging market economies, which also forms part of the FSB’s work program on non-bank financial intermediation. The report examines how external borrowing contributed to the build-up of vulnerabilities in emerging market economies and to the USD funding stress during the March 2020 turmoil as well as draws policy implications about measures to enhance emerging market economies resilience to lessen the impact of future episodes of stress. The report stresses the importance of ongoing work to address vulnerabilities from liquidity mismatches in open-ended funds, which would also help bolster the resilience of emerging market economies’ financial systems. IT also assesses the relevant policy measures taken in March 2020. Emerging market economies authorities deployed both standard crisis management tools and new measures to mitigate pressures in local currency bond markets and to stem capital outflows. Actions by advanced economy authorities were also important in mitigating strains in financial markets globally and addressing USD funding pressures. However, these actions did not directly address the underlying vulnerabilities in emerging market economies. The report encourages authorities to further consider closing data gaps to facilitate risk monitoring and the timely adoption of policies to mitigate external emerging market economies vulnerabilities; it also proposes a number of policy measures that seek to reduce emerging market economies vulnerabilities stemming from external funding and non-bank financing as well as to enhance crisis management tools. These include measures to:

    • limit the build-up of non-financial corporate foreign currency mismatches
    • further develop foreign currency hedging markets at the domestic and regional levels to manage currency risks
    • deepen local currency debt markets and foster a broader domestic investor base
    • tackle NBFIs’ vulnerabilities, including those relating to liquidity mismatches in open-ended funds


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    Keywords: International, Banking, Securities, Basel, Financial Stability, Emerging Markets, Derivatives, Cyber Risk, ESG, Climate Change Risk, Non-Bank Financial Institutions, Crypto-Assets, Stablecoins, Cryptocurrencies, Decentralized Finance, Liquidity Risk, Hedging, IMF, FSB

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